Yes, we believe that most construction loan disbursements to contractors will require a 1099-MISC form, although whether the form is required will depend on the specific facts and circumstances of each construction loan.

The IRS generally requires a 1099-MISC form for non-employees (excluding corporations and LLCs taxed as corporations) to whom your bank has paid at least $600 during the year for services they performed for the bank. When your bank makes payments to such non-employees on behalf of someone else (for example, on behalf of a borrower), the IRS rules require you to file a 1099-MISC if: (1) your bank performs management or oversight functions with respect to the payments, or (2) you have “a significant economic interest in the payment . . . that would be compromised if the payment were not made . . . .”

In our view, disbursements to contractors for construction loans meet the second test when a contractor could obtain a mechanics’ lien on the construction’s property if they do not receive payment for their work.

In addition, examples of the first test — “management and oversight functions” — include approving payments, ensuring that loan proceeds are properly applied to avoid mechanics’ or materialmen’s liens, and conducting site inspections to determine whether work has been completed (without inspecting the quality of the work). If your bank performs these or similar functions with respect to construction loan disbursements totaling over $600 to a non-corporate contractor, your bank should file a 1099-MISC.

For resources related to our guidance, please see:

• Income Tax Regulations, Return of information as to payments of $600 or more. 26 CFR 1.6041-1(e)(1) (“A person that makes a payment in the course of its trade or business on behalf of another person is the payor that must make a return of information under this section with respect to that payment if the payment is described in paragraph (a) of this section and, under all the facts and circumstances, that person (i) Performs management or oversight functions in connection with the payment (this would exclude, for example, a person who performs mere administrative or ministerial functions such as writing checks at another's direction); or (ii) Has a significant economic interest in the payment (i.e., an economic interest that would be compromised if the payment were not made, such as by creation of a mechanic’s lien on property to which the payment relates, or a loss of collateral).”)

• Income Tax Regulations, Return of information as to payments of $600 or more. 26 CFR 1.6041-1(e)(5) Example 1 (“Bank B provides financing to C, a real estate developer, for a construction project. B makes disbursements from the account for labor, materials, services, and other expenses related to the construction project. In connection with the payments, B performs the following functions: approves payments to the general contractor or subcontractors; ensures that loan proceeds are properly applied and that all approved bills are properly paid to avoid mechanics' or materialmen's liens; conducts site inspections to determine whether work has been completed (but does not check the quality of the work). B is performing management or oversight functions in connection with the payments and is subject to the information reporting requirements of section 6041 with respect to payments.”)

• Income Tax Regulations, Return of information as to payments of $600 or more. 26 CFR 1.6041-1(e)(5) Example 2 (“Mortgage company D holds a mortgage on business property owned by E. When the property is damaged by a storm, E's insurance company issues a check payable to both D and E in settlement of E's claim. Pursuant to the contract between D and E, D holds the insurance proceeds in an escrow account and makes disbursements, according to E's instructions, to contractors and subcontractors performing repairs on the property. D is not performing management or oversight functions, but D has a significant economic interest in the payments because the purpose of the arrangement is to ensure that property on which D holds a mortgage is repaired or replaced. D is subject to the information reporting requirements of section 6041 with respect to the payments to contractors.”)

• IRS Final Rule, 67 Fed. Reg. 48754 (“The determination of whether a person performs management or oversight functions with respect to a payment made on behalf of another, or has a significant economic interest in connection with such payment, is a factual one. Whether an agent has a reporting obligation under these standards must, therefore, be determined in each instance based on the particular facts and circumstances.”)